For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

Bogleheads is the name of an online investment community that adopted the moniker to honor Vanguard Founder John C. Bogle. The community boasts more than 50,000 members around the world who share investing ideas, help novice investors develop prudent portfolios, and discuss mutual funds, predominantly index funds and ETFs. (However, discussions on the group’s bulletin board, which averages 1,200 posts per day, can wander to such topics as cars, books, and rotisserie chicken.)

The Bogleheads are serious and smart enthusiasts who are vocal advocates of the Vanguard way of investing: Have a plan and stick to it, be balanced and diversified, minimize the impact of costs and taxes, and invest regularly at a healthy clip. Members of the community have published two books (The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning), maintain a presence on Facebook and Twitter, and meet regularly on a local and national basis.

In fact, the Bogleheads just recently held their 15th annual conference outside of Philadelphia, replete with a variety of group discussions, presentations by Bogle and former Vanguard Chief Investment Officer Gus Sauter, and a visit to Vanguard’s Malvern headquarters. During the visit, more than 200 Bogleheads met with Vanguard crew members, financial professionals, and portfolio managers, and enjoyed panel discussions and an open question-and-answer session with Vanguard investment experts.

Unfortunately, the sheer number of questions exceeded the time allotted to answer them. I sifted through the questions and chose three to answer here:

Is anyone concerned about liquidity with respect to Vanguard’s muni bond funds? What happens with a sudden rise in rates and/or a credit crisis?

I brought in Chris Alwine, head of Municipals & Credit Research in the Vanguard Fixed Income Group, to help answer this one. At the highest level, he noted that Vanguard devotes significant resources to the analysis of liquidity and the development of portfolio strategies to position our taxable and tax-free bond funds to handle the potential for large outflows during periods of extreme market stress. (Note that most Vanguard fund holders are buy-and-hold, long-term investors, so large outflows have historically not been an issue.)

While bond market liquidity is difficult to measure, Vanguard defines liquidity as the ability to sell large amounts of securities quickly with very little impact on the security’s price. When we examine municipal bond market liquidity today compared with levels that existed prior to the financial crisis, we see a small reduction, but not the large decline that is often discussed in the press. Trading volume remains high and bid/offer spreads are actually tighter than in the past. Both indicators support improved liquidity.

With respect to the management of our funds, we have had a longstanding policy to maintain reserves in the municipal bond funds to be prepared at all times for a sudden and large volume of shareholder outflows. Specifically, we hold a minimum of 4% in securities that are cash or cash-equivalent (mature in less than 1 year) and a minimum of 4% in high-quality securities with maturities between 1 to 5 years. Since the funds are managed to a high credit-quality standard, we also own securities beyond 5 years that are some of the most liquid securities in the municipal market.

The size of our liquidity position was established through analyzing historical periods of shareholder redemption activity and the inherent liquidity of the municipal market. Over the past 25 years, the municipal market has experienced numerous periods of elevated redemption activity (e.g., the Taper Tantrum of 2013, Meredith Whitney’s 2010 alarmist default call, the rate increase of 1994), and our reserve policy served the funds well in each of those episodes. While it’s likely that another period of large outflows will occur at some point, we remain highly confident that the funds are well-positioned for such an environment.

Do expense ratios include transaction costs?

No. Expense ratios reflect the annual operating expenses of a mutual fund, including advisory, administrative, distribution, and other costs. Expense ratios are expressed as a percentage of a fund’s assets and published in the prospectus, which also features a table illustrating the expenses an investor would pay on a hypothetical $10,000 investment over various time periods.

The transaction costs incurred when a fund buys and sells stocks and bonds is not included in the expense ratio, nor is it reported explicitly. Such transaction costs include commissions, spreads, and market impact, which are difficult to quantify accurately in a standardized manner. These costs are, however, reflected in a fund’s total return. As such, fund managers have strong incentive to execute trades efficiently and effectively.

Note that the greater the volume of buying and selling by a fund, the greater the drag on the fund’s return. Thus, a fund’s portfolio turnover rate can give you some indication of the potential impact of transaction costs on returns.

Why are there only two classes of fund shares for retail investors?

Actually, there are three share classes designed to meet the needs of individual investors: Investor, Admiral™, and exchange-traded fund (ETF). Investor Shares generally require a $3,000 minimum initial investment, with the exception of Vanguard Target Retirement Funds and Vanguard STAR® Fund, which require $1,000 to open an account.

John Woerth

John leads Vanguard Public Relations Group and serves as a company spokesperson. Since joining Vanguard in 1986, he has served as editor of Vanguard’s quarterly shareholder newsletter, "In The Vanguard," and monthly employee newsletter, "Crew's News." John earned a B.A. and a master's degree in journalism from Temple University.

Comments

R A. | November 16, 2016 12:21 am

I am an American citizen living and working in Zurich Switzerland. My intention is to retire in the United States and I would very much like to invest my savings there. I file state (Louisiana) and federal taxes every year, I co-own along with my siblings the home our parents built in Louisiana. My mail is forwarded to a sibling living in New Jersey, but I was told by Vanguard that I am not allowed to invest.
There are only two banks in Switzerland allowing Americans banking privileges, mine is UBS. I have signed a form giving the IRS access to my banking information; my situation could not be more transparent. I would very much like to be responsible by investing my saving for the future, and am determined it should be with Vanguard, while I am a great admirer of the company. A fellow expat has invested with Charles Schwab, so I am hopeful that I will soon be able to open an account with Vanguard.
I am very grateful for any help and advice in realizing my intention.

Thanks for your interest in Vanguard, R.A. You may establish a U.S. domiciled Vanguard account only if you’re a lawful permanent resident of the United States. When determining if you can open a brokerage account, the determination is in relation to where you currently reside, regardless of your citizenship. Since you currently reside outside of the United States, you’re unable to open a new account with Vanguard. We apologize for any inconvenience this may cause.

To reduce the risk that Vanguard might violate foreign securities laws and regulations, we have a foreign investor policy. If a person doesn’t live in the 50 United States, the District of Columbia, Guam, Puerto Rico, the U.S. Virgin Islands, or work in a U.S. embassy or live on a U.S. military base, he or she won’t be allowed to open a new Vanguard Brokerage Account or be named as joint owner. This restriction means that U.S. citizens living overseas, unless they’re embassy employees or live on a U.S. military base, can’t open new accounts.

However, you may be able to open a Vanguard account with one of our international offices. For more information, go to:

Yvonne C. | November 15, 2016 3:47 pm

I am happy that I started out with Vanguard as n index fund buyer and listened to Mr. Bogle & another good advisor Steve Butler C.C. Times & have managed through good times & a couple of bad times as well. For awhile my IRA kept on gaining then 2008came along & saw a lower total, but my son said, “That is a lower % of loss than most people have seen.” which made me feel better.
As I invested more money from an inheritance. I started using someone else’s picks for awhile, then added some Motley Fool information & diversification.Vanguard allowed me to invest with much less going to fees.
Thanking John Bogle for his words of how to use good sense with money, not playing the horses.
Sincerely,

Carl S. | November 3, 2016 12:05 pm

As part of earning a master’s degree in economics in the late 1980s, I took two graduate level courses in finance and investing. A principle that was recognized back then is that securities markets are “efficient” as the result of millions of participants attempting to identify investments that will “beat the market,” thereby making it largely a matter of luck for anybody to be able to do so consistently.

This principle makes it a good long-term strategy to invest in a broad selection of stocks and other securities for low expenses and taxes. I recognized back then that Vanguard, under John Bogle’s leadership, offered the best way for the vast majority of individual investors to apply this strategy. It has worked for me and for people whom I have advised over that period, and unless human nature changes will continue to do so in the future.

Tom W. | November 1, 2016 3:04 pm

Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

Michael G. | October 31, 2016 11:18 am

I am a Jack Bogle admirer and have been for decades. His philosophy is basically good common financial sense, followed by keeping investment expenses as low as possible. I thank John C. Bogle for the many contributions he has made to making investing as understandable as possible for the everyday person. If that means I am a “Boglehead” then count me amongst the legions! I am proud to be so! Long live the chief Boglehead of all! Jack, we love you!

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.